Date: October 26, 2009
To: Board of Directors
From: Chief Internal Auditor
Subject: Inappropriate Inflation of Revenues
This memo addresses a very serious issue related to inappropriate accounting practices by the management of the company. The company has been in the business of manufacturing and selling audio and video conferencing since commencement and it has witnessed substantial growth in recent years. The business model and selling strategy of the company was amended in early 2001 when it was decided to sell products through a nationwide distributor network with supporting sales staff along with direct sales to consumers. The company sells products to distributors for resale purposes across the nation and the four major distributors of the company include VSO Marketing, Starin Marketing, PT&T and NewComm Distributing.
The distributors of the company are required to sign an agreement with the company which specifies payment terms and provides that the distributors have to take ownership of the products after they leave the company warehouse and pay for these products within 90 days of delivery. The agreement also states that the distributors have no right to return products received from ClearOne. Revenues and subsequent accounts receivable are recognized when goods are shipped to the distributors.
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